Untying the Gordian Knot of Misclassification
by Courtney M. Malveaux, Esq.
Last August, Governor McAuliffe issued Executive Order Number 24 to create an Inter-Agency Task Force on Worker Misclassification and Payroll Fraud.
The announcement was easy to miss. It came out on a Friday afternoon.
But it’s an important issue if you do business in Virginia. This Task Force could sweep hundreds of thousands of workers into workers’ compensation, payroll taxation, and a broad array of state and federal regulatory regimes.
In the vernacular of government agency regulators, “misclassification”occurs when an employer incorrectly classifies workers as independent contractors, rather than as employees. The ramifications of this task force could be enormous for business.
Organized labor, migrant worker advocates and a group of construction contractors jump-started the issuein Virginia in 2011. They won passage of a General Assembly resolution directing the Joint Legislative Audit and Review Commission (“JLARC”) to publish a study, which went to print in 2012.
The study, written by JLARC staff with state agency guidance, provides limited value.
First, itcould not measure the extent to which misclassification occurs in Virginia. It did point to a 2010 audit by the Virginia Employment Commission (“VEC”) that identified over 5,600 misclassified employees in targeted workplaces. But because it was not a random sample, JLARC could not extrapolate to what level workers are misclassified in Virginia as a whole.
JLARC did attempt to deliver a bigger number. To get to this big number, it projected an average misclassification rate (21 percent) in seven other statesto Virginia’s workforce to forecast that Virginia might have 214,000 misclassified workers. The number is a stretch, however, given the industrial mix and the regulatory environment of the comparison states used (Colorado, Michigan, Maryland, Illinois, Minnesota, Massachusetts and Maine).
Despite the inherent difficulties of the study, it was helpful in highlighting industries that seem to have high levels of misclassification. Over forty percent of the workers VEC identified were in the construction industry. It also found high misclassification rates in service industries, such as waste management and remediation, hospitality and food services, real estate, transportation and warehousing. Other industries on VEC’s radar included health care and social assistance services, other service industries generally, and retail and wholesale trade.
So with the study out and the Governor’s order in, JLARC hands the ball off to an alphabet soup of governmental agencies to recoup the $28 million in tax revenues the state estimates that it loses each year due to misclassified workers.
It matters who will implement the study recommendations and how. In this case, it’s state agencies. They are planning an interagency meeting soon. As of this writing, no plans have been forthcoming to solicit input by business stakeholders.
As Virginia’s Labor Commissioner, I had the opportunity to see how these decisions are made in some of the 3,000-plus OSHA inspections that occur every year. Quite often, these (non-attorney) inspectors have to make to make snap decisions on a complex, multi-factor legal issue when determining whether workers at the site are actually employees.
Sometimes, you see a rogue employer skirting the rules. But often, you see a business doing its best to strike the right balance in structuring its workforce in an economy that defies old labels. Increased automation and worker autonomy have redefined work roles, especially in the manufacturing and service industries, creating an expanded role for legitimate independent contractor relationships. An agency auditor who may not have the time or background to appreciate the business model maydeclare workers “misclassified,” with all of the penalties and regulations that come with the label. The initiators of this discussion have presumed guilt in the language it uses.
The participants of the Task Force will also determine whether it will look at the business impact of policy change. If, for example, the Task Force shifts thirty-one percent of self-identified independent contractors into the workers’ compensation, wage protection and payroll tax systems, will it also study whether it will strain the resources of employers to the point of eliminating positions altogether? Would it measure the number of full-time employees shifted into part-time positions under the Affordable Care Act? Would it consider how the increased cost of services would impact the state’s recent gains in tourism and hospitality?
That’s good information to know. If your business lands in one of those categories, you will want to know state agencies’ next steps.
And speak up.
Virginia is not the first state to try to untie this vexing knot. Some states have passed laws to impose civil penalties for knowing and intentional violations. Our northern neighbor, Maryland, has deployed an employment-by-default regime, assuming anyone who works in landscaping or construction is an employee unless proven otherwise. Others have gone so far as to criminalize those deemed guilty of worker misclassification.
By contrast, Virginia has a way of untangling issues delicately, incorporating the concerns of all stakeholders, regardless of the partisan makeup of the General Assembly or administration. Certainly, it must resist the urge to resolve thiscomplicated issue by slicing it in a single stroke. A thoughtful appreciation of the complexity of our modern economywill help us untangle it.
If there’s one thing everyone knows about our Governor, it’s that he likes to make a deal. Business stakeholders need to lend their voices to ensure this initiative is a good deal for Virginia.
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Courtney Malveaux is an administrative, government affairs and employmentattorney with ThompsonMcMullan, P.C. in Richmond, Virginia. An experienced litigator, he served as Virginia’s Labor Commissioner through October 2013 and is the Immediate Past President of the National Association of Government Labor Officials. In addition to his legal practice, Malveaux represents industrial employers on the Virginia Safety and Health Codes Board. He can be (804) 698-6242 or at .